European listed REITs rallied significantly to end 2023, and were up more than 30% over the last two months of the year. However, two key measures of their valuations indicate they still are attractively priced.
Watch this month’s Real Estate Reel to find out why the rally occurred and what’s next.
KEY TAKEAWAYS
- European REIT performance rallied at the end of 2023, as the U.S. Fed and the ECB paused rate hikes.
- Despite the rally, they still trade at discounts to their net asset values.
- We believe that the correction in private market valuations is over halfway through what we expect, but listed REITs have already priced this in.
Transcript
European listed REIT performance. Fundamentals of listed REITs in Europe. And private real estate vs. listed real estate in Europe.
Welcome to the Real Estate Reel from Cohen & Steers.
This month, you may have guessed it, we’re watching Europe.
First, European REIT performance has been challenged for nearly two years now, with European REITs down -28% from their peak in August 2021 driven by a combination of rising interest rates and slowing growth. By comparison, global REITs, which include U.S. REITs, are down -16% from their peak at the end of 2021.
These reflect significant declines. But they also include a rebound in in global and European listed REITs. Global REITs were down more than 30%, and European REITs were down more than 45% at their lows in October.
European listed REIT performance
European listed REITs rallied to end 2023
At December 31, 2023. Source: Bloomberg.
European listed REITs have then climbed more than 31% in the last two months of 2023 compared to 25% for U.S. listed REITs. In fact, November was the 3rd best month ever for European listed REITs as they rose almost 14%. And the strength continued in December with the sector up 10.6% during the month.
Net-net, full-year returns for Global REITs were nearly 11% in 2023 with Europe at more than +17% at of the end of the year.
This rally is consistent with our view that the end of hiking cycles has historically delivered above-average returns and that recessions have created attractive entry points for listed REITs, with the best returns historically occurring early in the cycle.
This is playing out in real time now. In October, the ECB paused rate hikes for the first time in 15 months. While the European Central Bank has been more hawkish on future rate cuts than the U.S. Federal Reserve, we think the U.S. tends to be a leading indicator for international markets. Hence, European listed REITs responded to the perceived pivot in the Fed’s policy on interest rates.
It’s important to note that European REITs also have higher leverage than U.S. peers, so they have more upside / higher beta market reaction to the turn to expected lower interest rates. Specifically, European listed REITs have loan-to-values of around 38% compared to 35% for the U.S. It’s worth highlighting that both are relatively conservative compared to private market loan to-values.
The second data point we’re watching: valuations in European listed REITs.
Despite the recent rally in European listed REITs valuations, the sector still trades as -13% discount in NAV compared to a historical average since the beginning of 2011 of 6%, ranging from a minimum of -34% to a maximum of +11%. Discounted valuations have historically marked favorable entry points, underscoring our view that there’s likely to be normalization between listed and private valuations in Europe.
What’s happening is what historically happens. The public markets forced listed REITs to sell (or not buy) properties when valuations were at the peak over the past several years. But we expect European REITs will trade at premiums to NAV in the coming years there providing them a more attractive cost of capital to acquire properties at discounted valuations. Indeed, we are already seeing this play out in other parts of the world with global REITs trading at 7% premiums to NAV and the U.S. at 17%.
Another measure of valuation is price to funds-from-operations, also known as FFO. Price to FFO currently stands at around 17% for continental Europe compared to a historical average since 2011 of 18%, ranging from a minimum of 13.0 to a maximum of 23.3. In other words, European REITs are still cheap based on their price to FFO.
Valuations of listed REITs in Europe
Valuations have climbed but are still below average
At December 31, 2023. Source: FactSet and Cohen & Steers
The third data point I’m watching is listed REIT performance vs. private real estate in Europe. This is notable to watch because listed REITs are a leading indicator for private market in both downturns and recoveries.
Listed REITs typically lead private real estate by 12-18 months because they are liquid, daily traded securities that have real-time price discovery as a result.
European listed real estate vs. private real estate
Listed leads private real estate in selloffs and recoveries
At December 31, 2023. Source: Bloomberg, InREV, Cohen & Steers.
As you can see in this chart, while listed European REITs appeared to have bottomed, the INREV index that tracks total returns of European private real estate funds that primary own core commercial real estate has declined for five consecutive quarters and is now down -9.4% from its peak.
We believe that the correction in private market valuations is only halfway through what we expect, but listed REITs have already priced this in.
One final note on Europe. Our European investment team is expecting a stronger economic slowdown in Europe than in the U.S. As a result, they prefer somewhat more defensive sectors or sectors that have a relatively high yield.
This includes continental retail, German residential, tower companies, logistics with rental growth potential and data centers, self-storage, and healthcare. The team is more cautious on more cyclical exposure and lower yields like prime office exposure or Swiss real estate as yields are low and same for rental growth outlook.
Generally, our portfolio positioning is differentiated more by property sector and individual securities than by country, based on common drivers impacting property types across the region.
Subscribe to the Real Estate Reel via the link on screen and tune in next month to see what we’re watching next.
Watch December’s The Real Estate Reel: Real estate investing in 2024 – Three data points to watch
ABOUT THE AUTHORS
Rich Hill, Senior Vice President, is Head of Real Estate Strategy & Research, responsible for identifying allocation opportunities in both listed and private real estate and related thematic and strategic research.
FURTHER READING
The Retail Renaissance has arrived in private real estate investing
Values of open-air, necessity driven shopping centers have bottomed; a reality that most investors have yet to fully recognize.
A new market regime for REITs
A regime shift to lower rates is a favorable backdrop for REITs, in our view.
The Real Estate Reel: The potential benefits of blending listed REITs and private CRE
Adding listed REITs at certain levels to a private real estate allocation has been shown to increase performance, reduce volatility, and limit drawdowns.
Data quoted represents past performance, which is no guarantee of future results. The information presented does not reflect the performance of any fund or account managed or serviced by Cohen & Steers, and there is no guarantee that investors will experience the type of performance reflected. There is no guarantee that any market forecast set forth in this video will be realized. There is no guarantee that any historical trend referenced herein will be repeated in the future, and there is no way to predict precisely when such a trend will begin. The mention of specific securities is not a recommendation or solicitation to buy, sell or hold any particular security and should not be relied upon as investment advice.
This video is for informational purposes and reflects prevailing conditions and our judgment as of December 2023, which are subject to change. This material should not be relied upon as investment advice, does not constitute a recommendation to buy or sell a security or other investment and is not intended to predict or depict performance of any investment. This material is not being provided in a fiduciary capacity and is not intended to recommend any investment policy or investment strategy or take into account the specific objectives or circumstances of any investor. We consider the information in this video to be accurate, but we do not represent that it is complete or should be relied upon as the sole source of appropriateness for investment. Please consult with your investment, tax or legal professional regarding your individual circumstances prior to investing.
(FFO) Funds from operations is the REIT industry’s key earnings metric. It is calculated as GAAP net income, plus real estate gains (minus real estate losses), plus GAAP real estate depreciation and amortization
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